Middle market manufacturers often think workers’ compensation and disability are uncontrollable costs items. However, it’s more important than ever to change this way of thinking.

“Workers’ compensation is a significant variable cost element for manufacturers,” says Joe Galusha, managing director and leader for casualty risk consulting at Aon Risk Solutions. “It’s an area where controlling workplace injuries and their associated costs can actually become a competitive advantage.”

“We’re coaching our clients to take more responsibility over workers’ compensation and disability prevention, as well as claim management,” says Mike Stankard, managing director, Industrial Materials Practice, at Aon Risk Solutions. “If they do, there’s a significant opportunity to lower costs, and with that comes boosts in productivity, morale and many intangibles.”

Smart Business spoke with Galusha and Stankard about why workers’ compensation and disability management is crucial as well as cost containment and reduction strategies.

What’s the manufacturing landscape today?

Post-recession manufacturing activity is increasing, partially due to repatriation. But with that comes payroll growth, and then typically growth in workforce costs, which for manufacturing can largely be workers’ compensation and disability. There’s also negative trends related to the profile of the typical American worker that will compound the current challenges, so manufacturers that don’t put more effort into managing injuries and related costs may be at a disadvantage.

What workforce demographic trends make this management so essential?

About one-third of adults and almost 17 percent of youth are obese, according to the Centers for Disease Control and Prevention. Obesity drives comorbidity and complexities in an individual’s health, creating a link to the cost of care and recovery from injury.

At the same time, workers 55 and older are expected to be nearly 20 percent of the workforce within a year. A number of physical impacts — decreased strength, more body fat, poorer visual and auditory acuity, and slower cognitive speed and function — come with aging and affect a workers’ ability to recover from injury. People over 60 also are much more likely to be obese.

These trends not only affect employment-related injury costs, but also productivity and business continuity costs when workers are absent for non-occupational injuries.

How can big data be used as a tool here?

There’s never been as much data available for a nominal cost — the challenge is leveraging it. You need the right data at the right time to compare it to the right things. When benchmarking against other companies or applying data sets to your environment, jurisdictions, evaluation base and the age of the benchmarking sources are important to ensuring your data is pure.

Although there are external sources, many times third-party administrators (TPA) or insurance carriers have already done a tremendous amount of data mining and predictive modeling. Businesses just need to know it’s there and to start using it to drill deeper into the cause of loss and the cost drivers of workers’ compensation.

What are some best practices for managing workers’ compensation and disability?

The secret is preventing injuries and creating a healthy workforce. But injuries will occur, so focus on responding quickly with the right amount of effort at the right time on the right claim. Predictive modeling can help identify the types of claims likely to become more costly.

Understand what’s driving your costs by doing a baseline assessment of cost drivers and utilizing benchmarking to drill down. Then, align the incentives of all internal and external parties — TPA, carrier, broker, and vendors involved in loss control and claims management — to focus on the cost-driving elements, using a dashboard to monitor performance. This creates a sustainable loss control and claims management effort.

Many organizations need to align all stakeholders — human resources, finance, legal, operations, etc. Also, combine the efforts of health and wellness with workers’ compensation and safety. A streamlined approach creates a healthier workforce, reducing injuries and their costs.

Joe Galusha is a managing director, leader for casualty risk consulting at Aon Risk Solutions. Reach him at (248) 936-5215 or joe.galusha@aon.com.

Mike Stankard is a managing director, Industrial Materials Practice at Aon Risk Solutions. Reach him at (248) 936-5353 or mike.stankard@aon.com.

 

Hear more expert advice about workers' compensation and disability management in manufacturing by visiting our archived webinar.

 

Insights Risk Management is brought to you by Aon Risk Solutions

 

Published in Detroit

As accountable care programs are implemented, health care providers are going through significant financial, clinical, operational and strategic transformation. This has profound effects not only on health care providers, but also on those touched by health care delivery.

Payment transformation, re-admission penalties and demographic shifts are creating a perfect storm where health care providers have to be very skilled, says Ron Calhoun, managing director, national health care practice leader, at Aon Risk Solutions.

“Providers are going to have to get it right,” he says. “They’ve got to be clinically integrated, and a majority of them are not.”

Smart Business spoke with Calhoun about the risks health care providers are facing in this new environment.

What are the impacts of payment transformation and re-admission initiatives?

Numerous payment reform programs are moving providers toward payment for value and outcomes, as opposed to volume or service. The Patient Protection and Affordable Care Act has increased emphasis on Medicare/Medicaid outcomes, which has in turn led to more commercial sector payment transformation. The fundamental question is how are health care providers going to clinically manage a population in a non-clinical environment with all of the quality measures by which they’re assessed?

In 2012, Medicare’s Hospital Re-admission Reduction Program started penalizing hospitals for re-admission of certain acute myocardial infarction (heart attack), heart failure and pneumonia patients. Reimbursement penalties are expected to be $280 million in year one, and to increase as penalties go up and the program expands.

With financial risks tied to reducing re-admissions, there is de-emphasis on acute care — short-term medical treatment — and emphasis on post-acute care. This puts more demand on non-physician clinicians like registered nurses. Hospitals also are managing discharged patients to reduce exposure by either pushing a patient into a post-acute setting earlier or managing that patient more aggressively. However, this has direct and vicarious liability implications.

How are demographic changes creating risk?

As Medicare and Medicaid grow, payment transformation models will proliferate, placing more emphasis on outcomes and value. Roughly 44.3 million Americans are on Medicaid, which will increase by 10 to 20 million, depending on how many state Medicaid programs expand. Michigan Gov. Rick Snyder included an expansion of about 320,000 residents in his budget proposal. Also, 60 percent of the 169 million with employer-sponsored health care are ages 40 to 65, so the Medicare population will double to 88.6 million by 2035.

The Centers for Medicare and Medicaid Services is bundling reimbursements with outcomes, which shifts liability to the provider. Health care providers need to adhere to established clinical protocols, narrow physician practice pattern variation, be highly communicative between specialties and with patient hand-offs, and have sophisticated clinical decision support capabilities within electronic medical record platforms. The tighter the clinical integration, the more confident the health care provider will be in participating in bundled or value-based reimbursement.

Why are family caregivers so important?

About 45 million Americans are unpaid, informal caregivers for those with dementia and/or the top 15 chronic conditions. In the next three to five years, care will systematically go into the home, increasing the demands on home health. Health care providers must connect to caregivers to drive outcomes, such as decreasing re-admissions or increasing medication compliance.

What’s the impact for consumers?

As health care providers move toward value-based or bundled reimbursement, health care networks may become narrower and include only the highly effective providers in a given geography. Consumers with higher deductible, more consumer-driven plans will demand that all providers demonstrate an ability to comply with quality measures. Group health plan providers are certainly going to demand quality, as well. Population management will only become more critical. Consumers and employers will want relevant medical data pushed beyond the hospital’s four walls and into their hands.

Ron Calhoun is a managing director, national health care practice leader, at Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

 

Website: Aon’s health care reform microsite can help businesses navigate this complex issue. Visit www.aon.com/healthcarereform/ to learn more.

 

Insights Risk Management is brought to you by Aon Risk Solutions

 

Published in Detroit

[caption id="attachment_59379" align="alignright" width="200"] Neil Harrison, AGRC, group managing director, Risk Control, Claims & Engineering, Aon Risk Solutions

Ron O'Neill, senior claims consultant, Aon Risk Solutions[/caption]

Learning how to deal with disaster during a crisis is not a good idea. Hurricane Sandy’s aftermath reminds employers of the importance of insurance, disaster planning and claim preparation.

“Always at a time like this, organizations who were not affected need to take a step back and ask themselves, ‘What if?’” says Neil Harrison, AGRC, group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions.

Smart Business spoke with Harrison and Ron O’Neill, senior claim consultant at Aon Risk Solutions, about best practices business owners can use to ride out any disaster.

How did Hurricane Sandy affect the insurance industry?

With an event like Sandy, the insurance industry plays a role in business specific and general economic recovery. Brokers and insurance companies expect to be judged on their performance and response. With a significant amount of claims, there is a lot of resource pressure. Resource scale and leverage become key, and operational efficiency is a prerequisite for success.

It’s too early to comment on the longer-term impacts of insurance pricing or coverage availability. With these events, everybody has an opinion, but nobody knows at this early stage. Property damage, business interruption and contingent business interruption all create the overall cost. Also, just because a company is based in Detroit or somewhere out of Sandy’s way doesn’t mean businesses didn’t have customers, suppliers or vendors affected.

How should you handle an insurance policy?

The first step is ensuring you’ve got the right insurance coverage — the terms, the conditions in place, definitions of perils — and that you understand items such as limits and exclusions. Business owners should aim to have claims preparation coverage on the property cover. Then you can engage an expert for accounting work critical to quantifying and making the claim, and, generally, the process runs more smoothly.

Also ensure the values at risk — asset values and business interruption values — are understood and accurate. Too often, an organization has a claim and is underinsured or overinsured. A best practice is having an external expert work with you on assessing values during your policy renewal process. The business interruption is particularly important because it’s complicated to work out in post-loss panic mode. Since the recession, everybody has different values at risk, but organizations may have continued to index link their values or sums insured.

Beyond insurance, what can businesses do to respond well to disasters?

Organizations that have responded well are those with business continuity plans that are well defined, kept up to date, frequently tested and broad. The plans cover not just the direct issues of building damage but also employee safety and welfare issues, supplier issues, customer issues, etc.

Insurance is an outcome, in many ways, of business continuity. Take a broad look at the business, plan for every eventuality, make sure everyone knows what to do and have restoration firms on contract, as well as access to alternative power.

How should a business submit claims if it suffers damage?

When a significant incident hits, the company has some responsibility to mitigate the damage and cost. Much of it is common sense, but that’s easier to apply when it’s written down with clear responsibilities. Make sure that you:

• Report the loss to a broker or insurer immediately and there are clear lines of communication.

• Take immediate action to minimize loss.

• Keep documents, invoices or receipts, which become part of the insurance claim.

• Take photographs of the damage.

• Engage an external expert, if needed. When a business is in trouble mode, it’s all about recovery. Outside expertise allows you to talk to customers, suppliers and staff, while the expert handles the tactical, and somewhat more mundane, issues.

It’s important to have continuity planning, follow insurance best practices, consider a claim preparation clause and ensure common sense is applied after a loss. Disaster response, claim response and claim preparation are specialist technical disciplines, and businesses find investments in these areas have a positive return.

Neil Harrison, AGRC, is group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. Reach him at neil.harrison@aon.com.

Ron O’Neill is a senior claim consultant at Aon Risk Solutions. Reach him at (248) 936-5243 or ron.oneill@aon.com.

For information from the Aon Situation Room, Post-Tropical Sandy, including videos on claim steps and business interruption, visit http://insight.aon.com/?elqPURLPage=3422 For an archived webinar on Post-Tropical Sandy, visit http://www.visualwebcaster.com/event.asp?id=90768.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in Detroit

Learning how to deal with disaster during a crisis is probably not the right way to go. In the aftermath of Hurricane Sandy, employers are reminded of the importance of insurance, disaster planning and claim preparation.

“Always at a time like this, organizations who were not affected need to take a step back and ask themselves, ‘What if?’” says Neil Harrison, group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. “We are spending a lot of time talking to organizations and helping them to say, ‘OK, what if it was us? Would we have been ready? Were we prepared?’”

Smart Business spoke with Harrison and Roland Laury, CFPS, senior risk consultant at Aon Risk Solutions, about some best practices business owners can use to help them ride out any disaster.

How did Hurricane Sandy affect the overall insurance industry?

An event like Sandy gives the insurance industry an opportunity to demonstrate why it exists. Too often, businesses look at insurance purely as a cost, but the industry is playing a role in business specific and general economic recovery. From the perspective of brokers and insurance companies, they expect to be judged in terms of their performance and how they respond to clients. There is a lot of resource pressure, as the number of claims is significant, so already busy staff is suddenly taking on increased workloads. Resource scale and leverage become key, and operational efficiency is a prerequisite for success.

It’s too early for anyone to comment on the longer-term impacts of insurance pricing or coverage availability for individual businesses or industry segments. When these events happen, almost everybody has an opinion of the cost, and those opinions vary widely. The reality is nobody knows at this early stage. Property damage, business interruption and contingent business interruption all come together to create the overall cost. In addition, just because an organization is based in St. Louis or somewhere not in Sandy’s way doesn’t mean businesses didn’t have customers, suppliers or vendors who were affected. This may indirectly affect them in terms of business interruption or contingent business interruption.

What should business owners know about their insurance policy for an event like Sandy?

There are some key things that organizations should look at. The first step is making sure you’ve got the right insurance coverage — the terms, the conditions in place, definitions of perils — for this kind of event and that you understand it. Business owners need to understand limits and exclusions. They should aim to have claims preparation coverage on the property cover, meaning there’s the opportunity to engage an expert for some of the accounting work critical to quantifying and making the claim. With this coverage in place, and with a relevant expert engaged, generally speaking, a claim is better prepared and the process runs more smoothly.

Linked to that is the need to make sure that the values at risk — asset values and business interruption values — are well understood and accurate. Too often, an organization has a claim and then is found to be underinsured or overinsured. A best practice is having an external expert work with you on assessing those values during your policy renewal process. The business interruption is particularly important because it’s far more complicated to work out in post-loss panic mode. If you think about the economy since 2008, everybody has different values at risk now than they did then. Organizations may have just continued to index link their values or sums insured.

Looking beyond insurance, what can businesses do to respond well to disasters?

The organizations that have responded well are those with business continuity plans which are well defined, kept up to date, frequently tested and broad. The plans cover not just the direct issues of building damage but also employee safety and welfare issues, supplier issues, customer issues, etc. There’s no alternative to investing the time, and probably some money, in a far-reaching business continuity plan because it gives the balance sheet the best protection possible.

Insurance is an outcome in many ways of business continuity. Take a broad look at the business, plan for every eventuality, make sure everyone knows what to do when an incident happens, have restoration firms on contract so you’re first in queue when an incident happens, and have access to generators or additional alternative power.

How can a business best submit claims if it does suffer damage?

When a significant incident hits, the company has some responsibility to mitigate the damage and the cost of the loss. Much of it is common sense, but common sense is easier to apply when it’s written down and people know what they are responsible for. Make sure that:

  • Everyone knows to report the loss to a broker or insurer immediately and there are clear lines of communication.

  • Immediate action is taken to minimize loss.

  • You keep the documents, invoices or receipts for any vendors brought in for restoration or to provide alternative power, etc. Later, this will become a part of the insurance claim.

  • You take photographs of the damage. It’s surprising how many people get everything repaired and then try to make the insurance claim without proof.

  • You engage an external expert, if needed. Sometimes when a business is in trouble mode, it’s all about recovery. Outside expertise allows the business leader to talk to customers and suppliers and deal with staff, while the expert handles the more tactical, and somewhat more mundane, issues.

It’s important for businesses to have continuity planning, follow best practices for insurance, consider a claim preparation clause and ensure common sense is applied when a loss occurs. Recognize that disaster response, claim response and claim preparation are specialist technical disciplines, and many organizations find that their investments in those areas have a positive return.

Neil Harrison is the group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. Reach him at (312) 381-5660 or neil.harrison@aon.com.

Roland Laury, CFPS, is a senior risk consultant with Aon Risk Solutions. Reach him at (314) 719-5120 or roland.laury@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in National

In some grocery stores, your smartphone uses GPS to ping you when you’re near items on your shopping list. Other retailers allow customers to order something online, and when they arrive to pick it up from the store, the item(s) is already bagged and ready to go. Others still provide customers with options of where to buy, where to pick up or have delivered, and have price guarantees in order to create a positive customer experience and resulting sales.

With the retail industry facing challenging times, savvy risk managers are helping their companies manage costs and allocate capital strategically while finding ways to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk Solutions.

“These risk managers have the opportunity to help shape the business as they manage operations and costs,” she says. “At most retailers, risk managers are responsible for mitigating — for keeping the operation efficient, making sure that the use of insurance, self-insurance and alternatives are in line with overall company objectives, and that the treatment of risk is agreed to by all internal stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics, marketing, merchandising or IT.”

Smart Business spoke with Serpico about the current risks that retailers face and the best ways to mitigate them.

What is new in the retail industry with risk?

Aon compiles a retail industry analytics report annually, collected from proprietary data and client interviews, identifying the top 10 risks. Retailers say the global economic slowdown is the No. 1 risk. With consumer discretionary spending as the biggest driver of retail sales, the industry constantly battles variables that are out of its control, such as gas prices.

Second, retailers worry about damage to their reputation or brand. For any retailer, the worst possible scenario is that customers stop shopping in their stores. The third-biggest risk is a market of increasing competition, one of the biggest retail trends. How are people making their shopping decisions? What does this mean for retailers, and how can they respond? For example, how do they prepare for a situation in which a customer walks into the store, and tries something on before buying it at a lower price on their mobile device?

Other risks include:

  • Distribution or supply chain failure.

  • Regulatory and legislative changes, particularly surrounding workers’ compensation, normally the largest contributor to a retail risk manager’s total cost of risk.

  • Technology failure.

  • Failure to innovate and meet customer needs.

  • Failure to retain top talent and, therefore, manage crime, theft, fraud and employee dishonesty. With plenty of turnover, there is a need for safety training and internal loss control to ensure not only a good store experience for customers but also employee safety and that employees are behaving in ways beneficial to the company.

What risks are critical priorities to manage?

Most retailers have gotten really good at managing the more traditional risks — property, workers’ compensation and general liability. For example, they know how to get their stores running after a natural disaster and have programs to get associates back to work after an injury.

Emerging and changing risks are the new focus. These include network security, product liability for vendors, and wage and hour litigation. Network security is key, as this feeds in to a retailer’s reputation. It has customer data, employee data, financial information and, in some cases, medical data, and the risk is ever evolving because bad actors are getting craftier and losses are high profile.

Vendor/supplier contract management also is critical. A store might have products from 50 countries, so how does it control and manage contracts and litigation while understanding its exposure? Additionally, employment practices liability policies exclude wage and hour claims. However, this often drives a retailer’s exposure. Finally, retailers must continuously innovate and drive down costs so savings can be passed on to customers.

What best practices address common mistakes for retail risk managers?

As an industry, margins are thin, so retail risk managers need to carefully analyze their portfolios to determine the best use of capital. For example, should you have higher retentions on certain programs because the loss history is predictable? Or perhaps you might be buying too much insurance on other programs. Maybe there is a way to self-fund a certain amount of loss and buy excess capacity, which could reduce fixed costs. Is there an alternative that has not been considered?

If you have a loss that is not insured, have you vetted the process internally? Do you know how it will be funded? Risk managers ask these questions while working to create operational efficiencies for their companies. Asking questions helps avoid buying too much or too little insurance. Risk managers can also identify maximum capacity for loss across multiple lines of business. For instance, a $10 billion retailer may be able to absorb a penny per share of loss in a given year. However, you need to know what would happen if you have losses totaling five cents a share in a worst-case scenario year with a fire in your main distribution center, a customer death in a store and a security breach that compromises customer data. It is important to get feedback internally, and ensure that all stakeholders understand decisions being made around insurance and the effect those have on the business from a financial perspective.

Know your overall retentions and whether they are aligned with the corporate strategy. Some companies are extraordinarily risk averse, so retentions are low, while others are very comfortable managing their own risk. It is up to risk managers to know the company appetite and make decisions that align with the financial objectives. In addition, whenever there’s a loss, multiple internal stakeholders need to be involved in the process.

Lynn Serpico is a managing director and the National Retail Practice Leader at Aon Risk Solutions. Reach her at (203) 326-3464 or lynn.serpico@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in Detroit

The Patient Protection and Affordable Care Act is well named, as its aim is to make health care providers accountable for delivering better care. As a result, the reforms make skilled health care risk management even more vital.

“The Patient Protection and Affordable Care Act has initiated a fundamental shift in the manner in which health care providers are going to be paid,” says Ron Calhoun, managing director and national health care practice leader with Aon Risk Solutions. “We are beginning a transition from volume-based methodologies to outcome-based methodologies. Prior to this, we have been on a fee-for-service model, as health care providers were compensated for volume.”

Smart Business spoke with Calhoun about how risk management integrates with health care in an age of reform.

What effect is health care reform having on the health care delivery system?

One of the consequences is that reform is creating the need for delivery systems to more fully integrate and provide a broader continuum of services. To take a bundled reimbursement, as opposed to the old pay-for-volume model, health care providers will be compensated based on outcomes. That creates a need for them to more fully integrate. On the front end, they will need to build out their ambulatory capabilities, and on the back end, they will need to improve post-acute capabilities.

How will the shift to outcome-based compensation affect providers?

The Centers for Medicare and Medicaid Services has implemented a compensation mechanism called the value-based purchasing program for providers to measure quality. There are 12 clinical process measures and nine patient experience measures. This program, which took effect in fiscal year 2013, is about 70 percent weighed toward the 12 clinical processes and about 30 percent weighed toward the nine patient experience measures.

If health care providers have Medicare or Medicaid reimbursements in 2013, they can participate in this program. Then, those measures will have a real impact on their reimbursement thresholds. The measurements, plus the overall shift away from volume toward getting paid for outcomes, makes risk management programs even more critical than their historical place in patient safety.

How can a risk management program help with those measures?

Nationally, our health care delivery system does not have a standardized, systemic quality measuring process. When The Institute of Medicine issued its 1999 report, ‘To Err is Human,’ it started the patient safety movement.

Risk management has been proactive in patient safety since 1999, but we still have negative outcomes in our health care delivery service. After a six-year decline, we are starting to see an increase in the frequency of health care professional liability claims.

What factors affect the frequency and severity of health care liability claims?

From 2000 to 2006, there was a decrease in the frequency of health care professional liability claims, driven by three factors. One was the proliferation of tort reform. Second, there was an investment in patient safety systems at the provider level. Third, the provider community did a good job managing the perception of there being an availability-of-care crisis because of malpractice costs. Those have contributed to a downward pressure on health care professional liability claims.

From 2007 to the present day, there have been continued investments in patient safety initiatives, but we are seeing an increase in claims because of two factors. The first is tort reform erosion. In some states, tort reform bills have been either reformed or weakened. The second factor is economic stress.

There is an interesting correlation between the unemployment rate and an increase in health care professional liability and medical malpractice claims frequency. For every 1 percent increase in the unemployment rate, there is a corresponding 0.3 percent increase in health care professional liability and medical malpractice claims frequency, with a three-year lag. We are starting to see the post-2007 unemployment rate as a contributing factor to increasing claims frequency.

Unlike claims frequency, claim severity has increased at a steady rate, 4 percent over the past six years. That is cause for concern.

What can be done to improve outcomes and reduce medical claims?

One of the biggest barriers to improving risk management and patient safety is the ability to measure outcomes and the speed with which outcomes can be measured. One feature of the Patient Protection and Affordable Care Act is providing financial incentives to hospitals and physicians to further the meaningful use of electronic medical records (EMRs). The proliferation is dramatic, but it is still a fractured business.

There are three levels of sophistication in EMRs. The first level is simply making a paper file electronic. The second is computerized physician order entry, or CPOE. The third and most complex level is platforms with clinical decision support data. That third level will be necessary going forward to drive down the incidence of preventable medical errors.

More sophisticated EMRs will improve outcomes because physicians will have clinical decision support to help them adhere to clinical protocols at their fingertips. This is important because one of the biggest variables for integrated delivery systems to manage as they make the shift from volume-based to outcome-based methodologies is their ability to narrow physician practice pattern variation.

This technology comes with liabilities. If physicians have clinical decision support at their fingertips and depart from protocols, and an adverse event occurs, these errors could have a greater financial consequence than in the absence of such technology.

Ron Calhoun is managing director and national health care practice leader with Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in St. Louis

In some grocery stores, your smartphone uses GPS to ping you when you’re near items on your shopping list. Other retailers allow customers to order something online, and when they arrive to pick it up from the store, the item(s) is already bagged and ready to go. Others still provide customers with options of where to buy, where to pick up or have delivered, and have price guarantees in order to create a positive customer experience and resulting sales.

With the retail industry facing challenging times, savvy risk managers are helping their companies understand how to manage costs and allocate capital strategically while finding ways to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk Solutions.

“These risk managers have the opportunity to help shape the business as they manage operations and costs,” says Serpico. “At most retailers, risk managers are responsible for mitigating — for keeping the operation efficient, making sure that the use of insurance, self-insurance and alternatives are in line with overall company objectives and that the treatment of risk is agreed to by all internal stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics, marketing, merchandising or IT.

Smart Business spoke with Serpico and Todd A. Dillon, senior account executive at Aon Risk Solutions, about the current risks that retailers face and the best ways to mitigate them.

What is new in the retail industry with risk?

Aon compiles a retail industry analytics report annually, collected from proprietary data and client interviews, identifying the top 10 risks. Retailers say the global economic slowdown is the No. 1 risk. With consumer discretionary spending as the biggest driver of retail sales, the industry constantly battles variables that are out of its control, such as gas prices.

Second, retailers worry about damage to their reputation or brand. For any retailer, the worst possible scenario is that customers stop shopping in their stores. The third-biggest risk is a market of increasing competition. This is one of the biggest trends in retail. How are people making their shopping decisions? What does this mean for retailers, and how can they respond? For example, how do they prepare for a situation in which a customer walks into the store, and tries something on before buying it at a lower price on their mobile device?

Other risks include:

  • Distribution or supply chain failure

  • Regulatory and legislative changes, particularly surrounding workers’ compensation, normally the largest contributor to a retail risk manager’s total cost of risk.

  • Technology failure

  • Failure to innovate and meet customer needs

  • Failure to retain top talent and, therefore, manage crime, theft, fraud and employee dishonesty. With plenty of turnover, there is a need for safety training and internal loss control to ensure not only a good store experience for customers but also employee safety and that employees are behaving in ways beneficial to the company.

What risks are critical priorities to manage?

Most retailers have gotten really good at managing the more traditional risks — property, workers’ compensation and general liability. For example, they know how to get their stores running after a natural disaster and they have programs to get associates back to work after an injury.

Emerging and changing risks are the new focus. These include network security, products liability for vendors, and wage and hour litigation. Network security is key, as this feeds in to a retailer’s reputation. It has customer data, employee data, financial information and, in some cases, medical data, and the risk is ever evolving because bad actors are getting craftier and losses are high profile.

Vendor/supplier contract management also is critical. A store might have products from 50 countries, so how does it control and manage contracts and litigation while understanding its exposure? Additionally, employment practices liability policies exclude wage and hour claims. However, this often drives a retailer’s exposure. Finally, retailers must continuously innovate and drive down costs so savings can be passed on to customers.

What best practices address common mistakes for retail risk managers?

As an industry, margins are thin, so retail risk managers need to carefully analyze their portfolios to determine the best use of capital. For example, should you have higher retentions on certain programs because the loss history is predictable? Or perhaps you might be buying too much insurance on other programs. Maybe there is a way to self-fund a certain amount of loss and buy excess capacity, which could reduce fixed costs. Is there an alternative that has not been considered?

If you have a loss that is not insured, have you vetted the process internally? Do you know how it will be funded? Risk managers are asking these questions as they work to create operational efficiencies for their companies. Asking questions helps avoid buying too much or too little insurance. Risk managers can also identify maximum capacity for loss across multiple lines of business. For instance, a $10 billion retailer may be able to absorb a penny per share of loss in a given year. However, you need to know what would happen if you have losses totaling five cents a share in a worst-case scenario year with a fire in your main distribution center, a customer death in a store and a security breach that compromises customer data. It is important to get feedback internally and ensure that all stakeholders understand decisions being made around insurance and the effect those have on the business from a financial perspective.

Know your overall retentions and whether they are aligned with the corporate strategy. Some companies are extraordinarily risk averse, so retentions are low, while others are very comfortable managing their own risk. It is up to risk managers to know the appetite of their company and make decisions that align with the financial objectives. In addition, whenever there’s a loss, multiple internal stakeholders need to be involved in the process.

Lynn Serpico is a managing director and the National Retail Practice Leader at Aon Risk Solutions. Reach her at (203) 326-3464 or lynn.serpico@aon.com.

Todd A. Dillon is a senior account executive at Aon Risk Solutions. Reach him at (314) 854-0864 or todd.dillon@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in St. Louis

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the largest pieces of legislation in history, and it has complicated the regulatory environment by increasing the government’s oversight, supervision and resolution authority over financial institutions.

“As a result of Dodd-Frank, there are more agencies with oversight over more and different types of institutions, so compliance can be difficult,” says Michael K. O’Connell, managing director and Financial Institutions Practice leader of Aon Risk Solutions. “There are a lot of new agencies and those with redefined roles. There is new regulation of over-the-counter derivatives, a new agency for enforcing compliance with consumer finance rules, reformed credit rating agency regulation, changes to corporate governance and executive compensation, the Volker Rule, new registration requirements for advisers to certain private funds and significant changes in the securitization market.”

Smart Business spoke with O’Connell and John George, account executive at Aon Risk Solutions, about safely navigating this new, stricter regulatory environment.

What are some of the risks for noncompliance that businesses face with Dodd-Frank?

You might immediately think of the obvious financial risks — fines, penalties and injunctions — of not complying with any regulation, including Dodd-Frank. But before you get to that point, your business can incur significant costs responding to a regulatory investigation. On the back end, there also can be reputational harm, which is hard to pre-quantify but can be quite impactful.

These risks are interconnected, increasing the need for financial institutions to maximize the value of their risk transfer spend. Expert help can aid with this process by using robust data and analytic tools that help financial institutions understand their exposure, develop their modeling capabilities and ultimately derive the most value from their investment in insurance and risk mitigation.

How has executive liability changed with Dodd-Frank, and how can companies protect themselves?

There definitely is increased pressure on corporate boards of directors. The provisions of Dodd-Frank create new obligations that will drive shareholder expectations and potentially lead to heightened executive liability exposure. Directors and officers (D&O) liability insurance is designed to protect individual directors and officers, as well as the corporate entity from governmental or shareholder investigations and/or legal proceedings.

It is important to understand the Dodd-Frank provisions of clawback compensation, where boards can force executives to pay back some of their compensation for wrongdoing, corporate governance and whistleblower activity within the context of your company’s D&O liability program. Pay close attention to policies’ definitions and exclusions to understand the extent of coverage available.

In these areas, it’s critical to discuss what you really want to cover and how to achieve that within the context of the policy in the current insurance market. Understanding the scope of coverage is especially important in Side A D&O policies, which can provide dedicated personal asset protection to individual directors and officers when the company is either prohibited from indemnifying or not able to indemnify.

What are the best ways for financial institutions to cover privacy and security liability?

Privacy and security continues to be an area of focus for financial institutions. At the same time that the volume of personally identifiable information is increasing, so is regulatory focus on and awareness of privacy and security risk. With this, it is important for financial institutions and others to really understand and tailor their privacy and security coverage to their exposure.

Base policy forms vary greatly and must be customized to ensure maximum possible coverage. Take a diagnostic approach to privacy and security liability. Review the scope of coverage for first- and third-party exposures in conjunction with your existing insurance program and discuss coverage priorities with experts to fully define what you’re seeking.

The breadth of coverage available has evolved, as have the service offerings that can be bundled with a risk transfer program. An example is with breach management, where insurers offer turnkey solutions that can help financial institutions quickly and effectively recover from a breach. This approach is popular among mid-tier financial institutions that may not have pre-established relationships and resources to quickly handle a breach.

What are some other risks financial institutions are facing with operations and compensation?

Some financial institutions continue to struggle to meet regulatory requirements while maintaining sound compensation strategies. As regulation shifts from being guidance-based to rules-based, for smaller banks the question is when they will have to comply. Regardless of size, all financial institutions are being tasked with balancing risks and results, creating controls to reinforce that balance and ensuring effective management of incentive compensation.  The first step in managing compensation compliance is identifying covered employees. The process, and ultimately the covered population, may vary by firm and is primarily determined by business mix. Often the most effective and well-received approach is to include risk adjustments at the time of award or deferral, with potential future forfeiture, for incentive compensation plans.

With the evolving issues related to compensation, executive liability, privacy and security, and other risks, it’s important for institutions to take an enterprise-wide approach to risk identification, quantification and mitigation. Using experts, many financial institutions accomplish this with the goal of keeping their risk perspectives current in the changing regulatory environment. Risk management professionals can help implement risk frameworks, analyze key risk scenarios and model risk, and then align an institution’s insurance and risk transfer program to their underlying risk profile.

Michael K. O’Connell is a managing director and Financial Institutions Practice leader of Aon Risk Solutions. Reach him at (212) 441-2311 or michael.oconnell@aon.com.

John George is an account executive at Aon Risk Solutions. Reach him at (248) 936-5264.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in Detroit

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the largest pieces of legislation in history, and it has complicated the regulatory environment by increasing the government’s oversight, supervision and resolution authority over financial institutions.

“As a result of Dodd-Frank, there are more agencies with oversight over more and different types of institutions, so compliance can be difficult,” says Michael K. O’Connell, managing director and Financial Institutions Practice leader at Aon Risk Solutions. “There are a lot of new agencies and those with redefined roles. There is new regulation of over-the-counter derivatives, a new agency for enforcing compliance with consumer finance rules, reformed credit rating agency regulation, changes to corporate governance and executive compensation, the Volker Rule, new registration requirements for advisers to certain private funds and significant changes in the securitization market.”

Smart Business spoke with O’Connell and Jo Ellen Thelen, managing director, Aon Risk Solutions, about safely navigating this new, stricter regulatory environment.

What are some of the risks for noncompliance that businesses face with Dodd-Frank?

You might immediately think of the obvious financial risks — fines, penalties and injunctions — of not complying with any regulation, including Dodd-Frank. But before you get to that point, your business can incur significant costs responding to a regulatory investigation. On the back end, there also can be reputational harm, which is hard to pre-quantify but can be quite impactful.

These risks are interconnected, increasing the need for financial institutions to maximize the value of their risk transfer spend. Experts can aid with this process by using robust data and analytic tools that help financial institutions understand their exposure, develop their modeling capabilities and ultimately derive the most value from their investment in insurance and risk mitigation.

How has executive liability changed with Dodd-Frank, and how can companies protect themselves?

There definitely is increased pressure on corporate boards of directors. The provisions of Dodd-Frank create new obligations that will drive shareholder expectations and potentially lead to heightened executive liability exposure. Directors and officers (D&O) liability insurance is designed to protect individual directors and officers, as well as the corporate entity from governmental or shareholder investigations and/or legal proceedings.

It is important to understand the Dodd-Frank provisions of clawback compensation, where boards can force executives to pay back some of their compensation for wrongdoing, corporate governance and whistleblower activity within the context of your company’s D&O liability program. Pay close attention to policies’ definitions and exclusions to understand the extent of coverage available.

In these areas, it’s critical to discuss what you really want to cover and how to achieve that within the context of the policy in the current insurance market. Understanding the scope of coverage is especially important in Side A D&O policies, which can provide dedicated personal asset protection to individual directors and officers when the company is either prohibited from indemnifying or not able to indemnify.

What are the best ways for financial institutions to cover privacy and security liability?

Privacy and security continues to be an area of focus for financial institutions. At the same time that the volume of personally identifiable information is increasing, so is regulatory focus on and awareness of privacy and security risk. With this, it is important for financial institutions and others to really understand and tailor their privacy and security coverage to their exposure.

Base policy forms vary greatly and must be customized to ensure maximum possible coverage. Take a diagnostic approach to privacy and security liability. Review the scope of coverage for first- and third-party exposures in conjunction with your existing insurance program and discuss coverage priorities with experts to fully define what you’re seeking.

The breadth of coverage available has evolved, as have the service offerings that can be bundled with a risk transfer program. An example is with breach management, where insurers offer turnkey solutions that can help financial institutions quickly and effectively recover from a breach. This approach is popular among mid-tier financial institutions that may not have pre-established relationships and resources to quickly handle a breach.

What are some other risks financial institutions are facing with operations and compensation?

Some financial institutions continue to struggle to meet regulatory requirements while maintaining sound compensation strategies. As regulation shifts from being guidance-based to rules-based, for smaller banks the question is when they will have to comply. Regardless of size, all financial institutions are being tasked with balancing risks and results, creating controls to reinforce that balance and ensuring effective management of incentive compensation.

The first step in managing compensation compliance is identifying covered employees. The process, and ultimately the covered population, may vary by firm and is primarily determined by business mix. Often the most effective and well-received approach is to include risk adjustments at the time of award or deferral, with potential future forfeiture, for incentive compensation plans.

With the evolving issues related to compensation, executive liability, privacy and security, and other risks, it’s important for institutions to take an enterprise-wide approach to risk identification, quantification and mitigation. Using experts, many financial institutions accomplish this with the goal of keeping their risk perspectives current in the changing regulatory environment. Risk management professionals can help implement risk frameworks, analyze key risk scenarios and model risk, and then align an institution’s insurance and risk transfer program to their underlying risk profile.

Michael K. O’Connell is a managing director and Financial Institutions Practice leader at Aon Risk Solutions. Reach him at (212) 441-2311 or michael.oconnell@aon.com.

Jo Ellen Thelen is a managing director at Aon Risk Solutions. Reach her at (314) 854-0710 or joellen.thelen@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in St. Louis

Rick Miller, Managing Director, National Property Practice, Aon Risk Solutions

After the hit insurance companies took in 2011, businesses are continuing to experience changes in the property market in 2012.

“Companies can expect modest upward rate pressure due to severe global property losses back in 2011,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”

Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.

Smart Business spoke with Miller about what is happening in the property market and what new developments companies should expect to see this year.

What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?

Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm, and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.

The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.

Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.

The 2012 Atlantic Hurricane forecast is for lower-than-normal tropical storm activity.

What is behind the firming market?

The biggest drivers behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011. Year-to-date losses in 2012 have been low compared to 2011.

The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been, at best, flat, following a few years of a slow economy. Strong supply and lagging demand have maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.

How quickly will these changes occur?

We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective, or those that have had losses, have already seen pricing pressure.

Most natural catastrophe property business renews in the first two quarters of the year, as these buyers do not want to be in negotiations during hurricane season June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.

The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.

Accounts renewing in the first two quarters of 2012 experienced slightly more upward rate pressure than what was seen in 2011. The increase for most accounts was less than up 10 percent on rate. Some accounts that renewed in May or June had already experienced increased rates when they renewed last year and that reflected in less upward pressure than accounts that renewed in the Q1  and early Q2 of 2012. Absent a significant loss event such as a land-falling hurricane or earthquake in 2012, we expect rates will moderate and increased competition will return in 2013.

How will new developments affect limits, deductibles and coverage?

As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).

What new products and services have been developed for the property market, and how can these benefit companies?

Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.

The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.

Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or richard.miller@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in Detroit
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